Spend Matters welcomes this guest article from IHS.
Packaging producers saw some cost savings last year as the drop in oil prices lowered the cost for a variety of chemical products. Polyethylene (PE) is one of the largest volume thermoplastics and is utilized in a wide range of applications, with packaging accounting for the single largest market. After falling in the latter part of 2014, polyethylene prices have increased since the beginning of this year in Europe, Asia and North America; although prices are still lower compared to last year. Europe has the highest level of price increase activity as a result of the extremely short supply situation following numerous force majeure outages. This is not representative of grassroots consumption growth but rather an effort to backfill waning inventories. The situation appears to be resolving itself as we enter into the beginning of the summer vacation season, when demand takes a breather allowing supply to catch up.
On the US market, PE recently saw an increase of 5 cents per pound as producers exercise what little leverage they currently have. The pressure in the supply chain in North America is easing in addition to slightly lower ethylene cash costs. Another factor in rising prices is the arbitrage opportunity with China as the differential between domestic pricing in the United States and export opportunities cost and freight (CFR) in China ranges between 8 cents per pound and 10 cents per pound. At this level, enough margin is available to ship resin offshore with a positive net back. This will allow US producers to maintain a balanced to tight supply demand dynamics to tip the scales in their favor for pricing leverage.
The combination of a 5-cent price increase coupled with somewhat lower ethylene cash costs gave US PE producers margins a big boost during the months of May and June. In the near term, we anticipate flat to declining prices. In Asia, prices will hold steady as buyers remain cautious. Demand in Northeast Asia continues to soften. Some of this is due to languishing economic activity and some of it is due to buyer sentiment and the expectation of lower prices in the months ahead.
Looking forward, global PE demand will grow by more than 4 million metric tons this year with another 4 million expected for next year. This represents a steady average annual growth rate between 3.5% and 4%. The largest application area by far is film and sheet, which represents more than 50% of overall polyethylene consumption. Coming in at distant second and third places are injection molding and blow molding, respectively. On the supply side, total global capacity will increase by approximately 4 million metric tons in 2015, followed by an additional 7 million metric tons of new capacity in 2016. There will be a few small capacity closures in Europe this year. However, the level of plant closures and capacity rationalization will increase significantly as we enter into 2017 or 2018 when a significant amount of new capacity will be coming online, most of it in North America and Northeast Asia.
Bottom Line: Regional differences continue to play out in the chemicals market between North America, Europe and Asia, mainly due to various supply disruptions and differential impacts of changing energy prices. Overall, prices remain subdued as we enter the middle of the summer, with supply and demand moving more inline compared to the spring.